Why borrow through a trust

The two main reasons to consider borrowing through a trust are to protect assets, take advantage of possible tax benefits.

1. Asset protection

Asset protection is probably the biggest attraction of using a trust. Assets held through trusts are not legally "owned" by the trusts beneficiaries, meaning that trust assets are protected from the liabilities of those beneficiaries. Of course, the lender who lends to the trust will always protect themselves by requiring the appropriate guarantees and indemnities. All other creditors will be blocked from going after the assets of the trust though.

2. Tax benefits

The Government introduced the biggest tax advantage in choosing a trust rather than a company when it created a 50 per cent exemption from capital gains tax for all individuals. This exemption was explicitly extended to the beneficiaries of trusts, but not to the shareholders of companies.

Another important tax advantage of using trusts is that it facilitates the tax-free passing of assets between generations. While property can be transferred tax-free upon death by the use of an ordinary will, owners are able to effectively transfer their assets to their children before death by using trusts.

Income splitting - distributing investment income between members of a family to take advantage of lower marginal tax rates - has been partly curtailed. Distributions to children under the age of 18 are now penalised with tax at the top marginal rate. However, the ability to split income between spouses remains.